Inflation Worries Escalate Among Companies, Households, Bank of Canada Survey SaysUpdate

By Paul Vieira

OTTAWA--Inflation expectations among businesses and households climbed in the first quarter, and company executives warned they expect to pass on higher, tariff-fueled costs to customers regardless of a hit to demand, according to quarterly surveys released Monday by Bank of Canada.

The separate business and household surveys reflect responses that central-bank officials gathered in February and March, before President Trump unveiled 25% tariffs on foreign automobiles and a swath of hefty tariffs on America's major trading partners that sparked a significant selloff in global equities. Still, the survey results offer a bleak portrait of what's ahead for the Canadian economy, which relies on exports to the U.S. for about one-fifth of its gross domestic product. Bank of Canada officials will need to weigh the hit on economic activity against the risk of higher prices that tariffs entail.

The business-outlook survey indicated that 32% of Canadian companies are now planning for a recession in the country in the coming 12 months, representing a marked increase from the average 15% reading in the second half of 2024. Hiring plans among business owners are on hold, the central bank said, adding that consumer confidence in the labor market has weakened.

Both the business and consumer surveys indicate that inflation expectations are on the upswing. That will be of concern for the Bank of Canada, which sets interest rates to achieve and maintain 2% inflation.

"Firms no longer expect the increases in their input prices to slow," said the Bank of Canada, in reference to the goods and services that companies buy to produce their wares. The last time executives anticipated input prices to accelerate was in the second quarter of 2022, or around the time inflation in Canada peaked at over 8%. The central bank said this expectation was driven by concerns over tariffs, but executives suggested other factors were at play, among them Canadian-dollar weakness, a pivot toward non-U.S. suppliers, and tariffs from other countries, like China, working their way through the supply-chain network.

Many firms "also believe that a widespread implementation of tariffs would lead to higher selling prices because softer demand would only partially offset higher input costs," the central bank said, noting "some" firms do not expect to raise prices even if tariffs are implemented.

For months Trump pledged to slap hefty tariffs of up to 25% on all Canadian nonenergy imports, and a 10% duty on energy products. Trump's tariff-policy reveal did not include new duties for Canada relative to what he previously announced, such as the 25% tariff on steel and aluminum; a 25% tariff on all Canadian imports that are not compliant with the U.S.-Mexico-Canada trade deal, or USMCA; and a 25% on imported cars, such as those manufactured in Canada. Canadian officials and economists estimate that most U.S.-bound exports would eventually be deemed USMCA-compliant once companies complete the appropriate paperwork.

Traders have assigned a roughly 60% probability of a quarter-point rate cut from the Bank of Canada next week, Bank of Nova Scotia's economics team said. Prior to last week, the consensus among economists was for the Bank of Canada to hold its benchmark rate steady following seven straight rate reductions. Bank of Canada Gov. Tiff Macklem said last month that officials are focused on preventing the spread of initial tariff-fueled price increases, and on ensuring inflation expectations don't stray too far from the central bank's 2% target.

The business-outlook survey indicated that 23% of firms expect inflation to hover above 3% over the next two years, up from the prior quarter's 20%. Meanwhile, 44% of companies anticipate inflation to be between 2% and 3%.

Write to Paul Vieira at paul.vieira@wsj.com